Property Finance – Why a lower LTV means a higher loan

Loan to value ratios, the amount as a percentage of a property value that will lender will lend to you.

Some lenders lend 80% of property value, others will lend 70% of a property value sounds simple, but it isn’t ever quite that straightforward.

When 70% get be more than 80%

Why is it that a lender who will lend you 80% of a property value will sometimes give you a lower loan than a lender that will lend you 70% of a property value. If there is anything, any of us know about the finance sector, it is things that should be simple rarely are.

Let me explain why it happens and why it catches clients out because it all comes down to what valuation of a property the lender will lend against. It happens a lot with commercial mortgages.

To you and me, the value of a property is what it’s worth that’s because most people will talk in terms of open market value.

In other words, if I was going to sell or buy a property, what would I expect to pay for it? What similar properties are being sold for is open market value.

Lenders will sometimes lend on open market value. They may also lend on 180 day value or even a 90 day value. What that means is what you could expect to get for a property if it had to be sold within 180 days and likewise, 90 days, what could the lender get for it if they had to sell and complete within 90 days, those two figures are always lower than the open market value.

As a guide, 180 day value is typically 10% lower and 90 day value, 15% to 20% lower. It all comes down to what valuation the lender is using. If a lender is going to lend you 80% of a property value, but they have based their value on 180 days, that can often mean the lender that is going to lend you 70% of a property value, but their lending on an open market value will end up lending you more.

Strange isn’t it?

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So what appears obvious isn’t and it catches a lot of borrowers out because they go down the road of getting a valuation done and thinking they know how much they’re going to be able to borrow only for a loan offer to come back lower than they thought after the valuation.

It means they’re scraping around looking for a higher deposit for a purchase, or they can’t borrow as much as they thought and by now they’ve paid out on legals, on searches, a valuation or even booked a fixed rate.

At this stage those clients are not happy campers.

We’ll always explain to the client what valuation the lender is going to work on so it’s always nice and clear, because we understand what lenders do, but a lot of clients don’t.

If you are looking at borrowing against the property value, don’t just look at the loan to value that the lender advertises, look at what valuation they’re going to use to work out their real loan to value.

If you get those two pieces of information and put them together, you know where you stand. It should be simple but never is with the finance world, but let’s try and make it easier.

Any questions or queries with regard raising money against a property, get in touch.

In the meantime, loan to values, don’t take them at face value, look at what valuation lender will use and then work out where you are.

By Dave Farmer